Citi Raises Synergy Assumptions For Combined Western Digital/SanDisk Entity

Shareholders will vote on the proposed Western Digital Corp WDC's acquisition of SanDisk Corporation SNDK on March 15, and Citi has raised its synergy assumptions for the combined entity. Analyst Stanley Kovler increased his pro-forma combined EPS for "NewCo" to $6.10/ $7.47/ $9.72 over CY16 / CY17 / CY18 from $5.66 / $7.01 / $8.69 largely to reflect slightly higher synergies and much lower interest expense than he modeled previously, partially offset by a higher estimated CY17 / CY18 tax rate of 15 percent (12 percent prior). "Although we previously reflected the stated $500M in synergies goal outlined by the company 18 months post close, we have now added out-year assumptions in our pro-forma model given recent disclosures about the structure of the debt, and lower interest expense given calmer debt market conditions," Kovler wrote in a note to clients. The analyst also downgraded shares of Sandisk to Neutral given the limited upside to Western Digital's $79 takeout price. "With the narrowing of the merger takeout price spread to upside of just 3% from current levels, we believe our thesis regarding WDC's ability to complete its merger with Sandisk has largely played out," Kovler said. The analyst now refocus on the recently disclosed synergies and financing details that WDC / SNDK combined will need to work through as the deal enters its next phase. Kovler continues to believe that by and large shareholders of WDC and SNDK will in fact approve the merger, despite some minor opposition, given the accretive nature of the deal, synergies that exist in future proofing WDC's business, shareholder overlap. In addition, the endorsements of the deal by ISS and Glass-Lewis is a testament to the support for this deal from proxy-voting shareholders that should aid in approval. If the merger falls through, Kovler said WDC shares have downside risk to $36, while SNDK standalone shares have downside to $45, assuming resumption of dividend payments and share buybacks. Shares of WDC were down 4 percent at $48.05, and SNDK shares dropped 0.57 percent at $76.26.